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Volume :1 Issue : 4 1975      Add To Cart                                                                    Download

THE PRINCIPLE OF NEGOTIATING DECLARED OIL PRICES

Auther : Mohammad Yousefe Alwan

 
         The years 1972 and 1973 have witnessed a rise in actual oil prices in international markets.  The main causes of price increase are:
 
a)      the various nationalization acts which took place in Algeria (1971), and Iraq (1972).
b)      Partnership agreements which gave government the right to own part of the  production.
 
         The oil producing countries sought to negotiate, singly or collectively, with the oil companies a fraise in oil prices on the basis of current and future trends in oil markets and in world inflation.  However, these negotiations have failed.  This pushed OPEC countries to cancel the principle of negotiating with the oil companies.  Arab OPEC decided on 16.10.1973 to use oil as a weapon by reducing production at a rate of 5% per month (off the September level) until Israel withdraws its forces.  The six Gulf states decided to raise their oil revenues by 70% and to follow a fixed formula in regard to the declared price and the market price, whereby the declared price would be equal to 140% of the market price.  Although the oil companies have objected to OPEC’s resolution concerning prices, the largest two international oil companies – Exon and Shell – gave up their role as oil price determinants, and complied with the price set by the six Gulf States.  OPEC, then held several conferences during 1974 and decided in its 41st conference held on 13 September to raise the price of concession oil (40% of the production) by 3.5% or 33 cents per barrel.  This made the price of the barrel $11.65, from which the governments received $7.43.  The barrel price for the shared oil (60% of the production_ became $10.83.  The 42nd OPEC conference held in Vienna in December 1974 unified the oil price and this has raised the government’s revenue per barrel to $10.12.
 
           OPEC resolutions had direct consequences on oil producing countries and on oil importing countries.  The main effect of these resolution on oil producing countries was a sharp rise in their returns and surpluses. However, this rise was tremendously exaggerated by western economic sources.  To take an example: World Bank sources has estimated that the six gulf states (Saudi Arabia, Iran, Kuwait, Iraq, Abu Dhabi and Qatar) would own $280 billion out of total world reserves of $400 billion in 1980, after spending all possible sums on internal development.
 
         The income of all OPEC countries rose from $15 billion in 1972 to $100 billion in 1974, with a surplus of $60 billion.  World Bank sources have also estimated in 1974 that financial surpluses of OPEC countries would exceed $650 billion bin 1980 and $1250 billion in 1985.  However, current Western estimates show that these surpluses would not exceed $200 billion in 1980, and might disappear in 1985.  In fact Arab oil revenues lose their importance when compared to other sections of international economy i.e. Arab oil returns in 1974 were $61.8 billion, while French exports for the same year were $44.7 billion, German exports $88.6 billion, total investments of major oil companies were $105.4 billion, and U.S. budget for 1975 / 1976 was 349.4 billion out of which $95 billion were spent on military demands.
 
         The increase in oil prices for the consumer is not the fault of the oil producing countries but of the policy of monopolization in pricing and the duties (tariff) policy followed by oil importing countries.  It is known that Western Europe collects customs duties from oil sales within Europe, which exceed the earnings of OPEC countries from selling crude oil.  Also, the share of OPEC countries per barrel equals only 7.9% of the final price, while 92.1% of the price goes to the oil consuming countries and to the internal oil cartel.
 
         Moreover, oil revenues do not finance developmental projects in the Third World, but in the Western countries.  Hence oil-consuming countries should lower their customs duties on petroleum products rather than ask OPEC to lower the price of crude oil.  Industrial (or advanced countries) are trying to regain the money they pay for oil by recycling these sums i.e. re-investing them in Western economy.  Arab investments in Industrial countries were $45 billion in 1974.  Furthermore, inflation takes care of the rest of OPEC surpluses i.e. prices of food and fertilizers have tripled during the past two years, while the price of wheat rose from $1.5 per bushel in mid 1972 to 4.6 to early 1974.
 
         Developing countries, on the other hand, were hard-hit by the increase in oil prices.  This was coupled by the increase in prices of goods imported from industrial countries.  OPEC countries, especially Arab, can help developing countries by selling them oil at lower prices, by investing in them, and by direct assistance.
 
        The author reaches several conclusions, most important which are: 

1)      The present system of oil industry has extremely benefited the American consumer, has and still is strengthening international capitalism.

2)      Arab countries, though the richest area in the world, are still poor and backward.  They should nationalize their oil and put an end to their dependency on oil cartel and capitalist monopoly.  Meanwhile, they have the right to double their profits by increasing oil prices.

 3)      Oil producing countries should lower their production to the level of meeting their needs of foreign currency.

 4)      Arab countries should invest oil revenues internally, and they should tie the price of their oil to the price of manufactured goods and technical services, which they buy from the industrial countries.

 5)      OPEC countries should seek to establish direct relationship with the oil consuming countries, dropping out the Cartel companies.

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